Businesses in the construction industry rely heavily upon independent contractors. While it is sometimes clear that a party is a true subcontractor, it is common to misclassify who are legally employees as independent contractors.
Why do the governments, employers and workers care about this issue? In a word, money. Businesses without employees do not pay payroll and employment taxes, workers compensation premiums, health insurance premiums or other benefits. In turn, no money for taxes and other costs is deducted from the workers’ payments and they receive no benefits.
Businesses in the construction industry rely heavily upon independent contractors. While it is sometimes clear that a party is a true subcontractor, it is common to misclassify who are legally employees as independent contractors.
Why do the governments, employers and workers care about this issue? In a word, money. Businesses without employees do not pay payroll and employment taxes, workers compensation premiums, health insurance premiums or other benefits. In turn, no money for taxes and other costs is deducted from the workers’ payments and they receive no benefits.
Effective March 11, 2023, the U.S. Department of Labor revised the employee misclassification criteria under the federal Fair Labor Standards Act. The new rule rescinded the 2021 independent contractor rule and replaced it with a six-factor test that considers:
- Opportunity for profit or loss depending on managerial skill
- Investments by the worker and the potential employer
- Degree of permanence of the work relationship
- Nature and degree of control
- Extent to which the work performed is an integral part of the potential employer's business
- Skill and initiative
Note that the FLSA only applies to federal law matters such as minimum wage and overtime, and does not impact how each state evaluates employee misclassification. The following questions can help determine if workers would legally be deemed employees. Every time you answer “no” it indicates the worker will be deemed your employee:
- Do they maintain a separate business with their own office, equipment and other facilities?
- Do they conduct business through a legal entity like a corporation or LLC?
- Do they have federal and state tax identification numbers?
- Do they have their own liability and workers compensation insurance policies?
- Do they use their own tools, equipment and supplies?
- Do they not wear any clothing containing your company’s name or logo?
- Do they not drive your company’s vehicles?
- Do they also work for other companies?
- If required, are they licensed or registered with the state where they do business?
- Do you enter into signed contracts with them?
- Are they not paid hourly, but instead, on a commission, a per-job, per unit or competitive bid basis?
- Do they control the means of performing their work?
- Do they incur the main (or any) expenses related to their work?
- Do they have continuing or recurring business liabilities, such as rent, loans, etc.?
- Do they have any risk? In other words, can they profit or suffer a loss on their work, or do they have no downside no matter how long a job takes or how much the materials cost?
- Are they liable for failure to complete the work properly? Could you sue them for delay damages, poor workmanship or other breach of contract?
If you have concerns after reviewing this list, discuss the matter with an experienced attorney in your state to address any weak spots and increase the likelihood that your workers will survive scrutiny in an audit.
